The dream of retirement is one that can be elusive, especially if you have stock market investments that have taken a hit. One potential source of retirement income that you may not have considered is your home.
A recent US News article looked at several options to use your equity in your home to partially fund your retirement. Here’s what you need to know.
If you feel that you can live in a smaller space than you currently do, one option is to sell your current home and buy a less expensive one. This solution is best if you either own your home outright or you have owned it for a while and have a lot of equity.
For example, if you own your current home and it’s worth $500,000, you could buy a small condo for $200,000 and net $300,000 from the sale. You’d need to invest the money to avoid capital gains tax, but if you invest wisely, you could see a fair amount of additional income from your investments.
On a related note, retirees living in a high-cost area may want to consider relocating to a less expensive location prior to retirement. You should invest your profits as listed in #1, but your money will stretch further if you can reduce your living expenses.
For some retirees, moving to a warm location is a priority. Real estate prices may be high in some areas but if you stay flexible, you can find a location with a low cost of living that will enable you to live comfortably on your retirement income.
The third option open to you is to apply for a home equity line of credit or HELOC. If you have at least 20% equity in your home, you may be able to qualify.
To calculate your home equity, take the current market value of your home and subtract the total of all outstanding liens. Liens include mortgages, second mortgages, home equity loans and other liens. Then, take the resulting number and divide it back into your home’s value and that is your equity.
With a HELOC, you can take out a lump sum payment or withdraw money as you need it. Your best bet is probably going to be to withdraw money as you need it because you’ll pay only for what you withdraw. However, a lump sum withdrawal could be invested and earn retirement income.
Addition Financial’s HELOCs come with affordable rates and flexible terms. Click here to learn more.
Another option mentioned in the US News article is a reverse mortgage. Reverse mortgages allow people 62 and older to borrow against their equity with either a lump-sum payout or monthly withdrawals. When the borrower dies, the home is sold to repay the balance due.
With a reverse mortgage, you may not be able to leave your home to your heirs. That makes it a less attractive option for most people than a HELOC, which offers spending flexibility and doesn’t tie up your home in the same way. Of course, if you die your heirs will be required to repay the loan when they sell the house, but they can take the full term of the HELOC to do it.
Are you interested in applying for a HELOC to supplement your retirement income? Click here to learn about Addition Financial’s HELOC options and begin the application process.